Global Tactical Asset Allocation - PDF

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                                                                                          September 2007

Financial markets are very much in        underweight position in bonds             large banks borrowed through the
turmoil, as the problems in the US        unchanged.                                discount window. The move
sub-prime housing market have                                                       revealed the Fed’s willingness to
                                          MACROECONOMIC SITUATION
spread to other markets and also                                                    calm the markets and prevent the
seem to be impacting the real             United States                             liquidity crunch from developing into
economy. We remain optimistic that                                                  a general credit crunch.
                                          The distress in the US sub-prime
these sub-prime problems will not                                                   Nonetheless, money market rates
                                          mortgage market has intensified. Not
trigger a global recession. Although                                                have not settled. Overnight rates
                                          only have the sub-prime problems—
central banks have stressed that                                                    continue to have a large spread over
                                          and those in related derivatives—
they will not bail out over-leveraged                                               the Fed funds rate.
                                          spread to other markets, but the real
investors and mortgage holders, we
                                          economy also seems to have been           The problems in financial markets
believe that they will recognise that
                                          affected.                                 have developed against a backdrop
the current liquidity crunch could turn
                                                                                    of a softening economy. The housing
into a credit crunch and thus             The financial markets problems have
                                                                                    market is experiencing a double dip,
endanger economic growth. As a            the potential to develop into a
                                                                                    confidence is waning and the
result, we expect central banks to        general credit crunch and have an
                                                                                    number of jobs shrunk in August.
continue to inject liquidity into         impact on the real economy. The
                                                                                    Meanwhile, inflation, which scared
financial markets and, in the US, to      Federal Reserve was initially
                                                                                    investors as recently as June, has
cut rates, even if that creates moral     criticised by some market
                                                                                    become a non-issue. Bad news has
hazard problems. Eventually, the          participants for its inactivity in the
                                                                                    predominated in the US housing
conviction that central banks will        current liquidity crisis. But after the
                                                                                    market. US builders’ confidence is
operate as lenders of last resort         ECB led the way in providing
                                                                                    back at levels last seen just after the
should help to prevent the financial      liquidity, the Fed followed suit.
                                                                                    savings & loan crisis of 1990-1991.
crisis from turning into a full-blown     Although the Fed initially provided
                                                                                    Housing activity is 40% off its peak
economic crisis. If the US housing        less support than the ECB, money
                                                                                    in late 2006. In July, pending homes
market problems can be contained,         market rates in the US were pushed
                                                                                    sales dropped by more than 12%
the global economy is unlikely to end     below the official rate. Money market
                                                                                    mom. It should not have come as a
up in a recession.                        rates have even been below 5%.
                                                                                    surprise when home prices fell by
                                          The Fed has thus effectively eased
In this environment, we continue to                                                 more than 3% yoy in the second
                                          monetary policy, albeit in a way that
believe that an overweight position in                                              quarter. The bad news is that there
                                          can be reversed quickly. On 17
equities is justified, due to                                                       is no end in sight. Consumer and
                                          August, the Fed took centre stage by
companies’ solid balance sheets,                                                    producer confidence levels are
                                          cutting its discount rate. This is not
central banks’ willingness to prevent                                               waning, though they are
                                          the official money market target rate,
a credit crunch, the robustness of                                                  substantially above recession levels.
                                          but a penalty rate through which the
the global economy outside the US,                                                  In the current circumstances of a
                                          Fed performs its function as lender
the solid profit outlook and the                                                    cooling economy, we think that
                                          of last resort. The positive market
reasonableness of valuations. Within                                                inflation fears will fade rapidly,
                                          reactions (equity prices and bond
equities, we remain overweight in                                                   despite relatively strong increases in
                                          yields rose) showed that the Fed’s
emerging markets, due to the                                                        materials prices and unit labour
                                          psychologically important step was
economies’ solid growth and the                                                     costs. The economic circumstances
                                          helping. Banks were actively
valuation cushion versus developed                                                  have cooled so much that the three
                                          encouraged to borrow through the
markets. Barring a recession, bond                                                  most important criteria for a Fed rate
                                          discount window and the terms of
yields are unlikely to fall much from                                               cut are satisfied. First, the economy
                                          these loans were eased. Several
current levels. We have thus left our                                               has been growing below trend for

                                                                                                                   Page 1
                                                                 GLOBAL TACTICAL ASSET ALLOCATION

the last four quarters. Second,           Eurozone                                   and the prospects for employment
inflation is within the Fed’s comfort                                                growth look promising. Profits are
                                          The eurozone economy is in good
zone and is unlikely to increase.                                                    growing at one of the highest rates in
                                          shape. Although leading indicators
Third, employment is falling, while                                                  the developed world and Japan is
                                          seem to be showing that eurozone
unemployment is rising. The                                                          benefiting from strength in
                                          economies have passed their peaks,
question is no longer whether the                                                    neighbouring Asia––China in
                                          growth is still robust. Improved
Fed will cut, but rather by how much.                                                particular––which is partly offsetting
                                          profitability has been a favourable
                                                                                     the recent appreciation of the yen.
The current situation has similarities    factor for investment and
with the financial crises of 1998 and     employment growth. Capacity                In August, the Bank of Japan (BoJ)
in 2001. In 1998, a financial crisis      utilisation has accelerated sharply        injected funds into money markets
broke out after Russia defaulted on       and the utilisation rate, which            but then drained money from the
its debt and the LTCM hedge fund          declined slightly in the second            financial system after overnight call
collapsed. The current financial crisis   quarter, is now higher than the most       rates fell (in the opinion of officials)
looks more serious than the LTCM          recent peak in 2000. Employment is         too far. This can be interpreted as a
crisis. Back in 1998, it was known        rising robustly and unemployment is        sign that the BoJ is eager to raise
where the risks were and the Fed          at 6.9%, which is a multi-year low.        rates. But we believe that the BoJ
could broker a deal to save the           Enhanced job security and a less           will be forced to shelve its plans for a
financial system. Today, it is not        indebted consumer than in the US           rate hike, first because of the recent
known who holds the sub-prime-            should contribute to consumption           turmoil in financial markets, and
mortgage-related assets. Moreover,        growth in the region. Although export      second because of the cooling of
there are widespread concerns that        growth may decline somewhat due            both the Japanese and US
large holdings of these products are      to the strong euro and decelerating        economies.
owned by less-regulated financial         global trade, we expect the eurozone
                                                                                     Emerging markets
institutions, such as hedge funds.        economy to expand above trend
Moreover, the credit risks are not        both this year and next.                   With the global credit market under
limited to the US but are spread                                                     serious pressure and economic
                                          The turmoil in financial markets
around the globe. The current                                                        growth momentum slowing in the
                                          turned out to be stronger than the
economic weakness has similarities                                                   US, Europe and Japan, the outlook
                                          fears about inflation. In the past few
with the recession of 2000-2001,                                                     for global trade has deteriorated in
                                          months, the ECB had hinted that it
when an over-leveraged corporate                                                     recent months. Emerging Asia—the
                                          would hike rates. The economy has
America got into trouble after the                                                   world’s manufacturing centre—is
                                          been growing above trend for a while
dotcom bubble burst and the Fed cut                                                  likely to be affected by a global
                                          and money growth re-accelerated to
rates aggressively to save the US                                                    economic slowdown. The magnitude
                                          11.6% yoy in July, far above the
from a severe recession. Today,                                                      of the Asian slowdown will depend
                                          4.5% that the ECB has as the upper
corporate balance sheets are sound,                                                  on the buoyancy of the US financial
                                          end of its comfort zone. Inflation was
while the problems centre on an                                                      system. For the time being, we are
                                          1.8% in July but is likely to shoot
over-leveraged consumer. Since                                                       assuming that global trade growth
                                          through the 2% threshold in the
consumption makes up roughly two                                                     will start declining in the next few
                                          coming months when favourable
thirds of the economy, the potential                                                 months, which will have a negative
                                          base effects disappear. The ECB
downside for the economy is thus                                                     impact on GDP growth in the open
                                          has therefore not dropped its
substantial.                                                                         Asian economies. We have thus
                                          tightening bias. But it would be
                                                                                     reduced our 2008 GDP growth
In our view, the Fed will cut rates.      strange for the bank to flood the
                                                                                     forecast for the region by a full
The extent of the cuts will depend on     market with liquidity at the same time
                                                                                     percentage point to 7%. A sharper
both financial-market developments        that it was raising the cost of finance.
                                                                                     growth adjustment is not justified at
and the softening of the economy. If      As a result, we expect the ECB to
                                                                                     this stage, first because China will
the financial-market turmoil suddenly     remain on hold for the rest of this
                                                                                     probably continue to gain market
intensifies, we expect the Fed to         year.
                                                                                     share in global import markets, and
take large steps to prevent a credit
                                          Japan                                      second because of the typical
crunch that would paralyse the
                                                                                     increase in public investment
economy. But we believe that the          The latest data seems to show that
                                                                                     throughout Asia in periods of
Fed’s cuts will reflect the cooling of    the Japanese economy has still not
                                                                                     declining external demand.
the US economy. Given the negative        escaped from deflation. In the
news from the labour and housing          second quarter, growth fell by 0.3%        With credit markets likely to remain
markets, we now expect the Fed to         qoq. Headline inflation was flat in        tight for a while and global trade
cut by at least 50 bp this year.          July, while core inflation ex-energy       growth likely to start slowing, we
                                          fell by 0.5% yoy. But there are also       expect a more challenging
                                          some pockets of strength.                  environment for Brazil in the next
                                          Unemployment is at a multi-year low,       few quarters—perhaps even years.

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                                                                 GLOBAL TACTICAL ASSET ALLOCATION

As the country’s fiscal accounts,         The statement accompanying the            second quarter, sentiment indicators
debt ratios and external financing        reduction indicated an implicit easing    and leading indicators deteriorated,
needs are in much better shape than       bias. Against the background of a         and inflation is at zero at best.
five years ago, when Brazil was           flight to quality, the Treasury market    Nonetheless, we are expecting a
confronted with its last financial        rallied and valuations now look           turnaround in 2008, based on labour
crisis, we assess the likelihood of       expensive. Nevertheless, we are           market shortages spilling over into
another crisis to be very low. But we     expecting the sub-prime problems to       higher wages and thus higher
do believe that the increased             remain a factor in the market, which      inflation expectations. Economic
headwinds from the global                 should continue to support                growth is forecast to be above trend
environment will bite into growth.        government bonds. At the time of          and land prices are rising. After
The real is likely to weaken further      writing, the market is pricing in 75 bp   recent rallies, JGB valuations look
due to lower export revenues and          of rate cuts in the US. As a result,      slightly stretched and our overall
falling portfolio capital inflows. As a   the potential for ten-year Treasury       view on JGBs is neutral to bearish.
result, domestic interest rates are       yields to move down seems limited.        The BoJ was widely expected to hike
unlikely to be cut as much as             Market risks would be greater if the      interest rates in September, but did
originally expected. Depending on         Fed does not cut rates than if it         not do so, in part because of the
the magnitude of the currency             does. The market is likely to remain      market turmoil and in part because
depreciation, interest rates might        choppy in the near term, so               of the adverse data flow. If financial
even have to be raised. Lower             forecasting developments is difficult.    markets calm down and economic
export growth and higher domestic         The front end of the yield curve has      data bounces back from the second-
interest rates should reduce overall      led the recent market rallies. If the     quarter setbacks, the BoJ may
economic growth. We have reduced          Fed does cut rates, as expected, this     reconsider a rate hike, though it is
our 2008 GDP growth forecast from         should offer further support to the       unlikely to take place in 2007.
5% to 4%.                                 front end of the curve. When
                                                                                    Bond allocation
                                          markets calm down, we believe that
                                          the longer end will take the impact.      Spreads on riskier bonds and
Ten-year bonds have rallied as the        We expect to see further steepening       corporates have widened over the
troubles in financial markets have        of the yield curve, as well as wider      summer, due to the turmoil in
triggered safe-haven flows. US            breakeven inflation on rising risk        financial markets. As a result, our
Treasury yields fell from 5.3% on 12      premiums/mortgage-contagion fears.        overweight government bonds
June to 4.4% on 13 September. A           In the current volatile environment,      position has worked out well. We
similar pattern was visible for ten-      we have low conviction about the          believe that spreads have not
year Bunds and Japanese                   quality of investment opportunities.      widened enough to justify
government bonds. Through the                                                       considering overweight positions in
summer months, the spreads on                                                       the riskier bond categories. We
riskier bonds widened as investors        The macroeconomic outlook for the         therefore remain overweight in
fled from riskier products, while         eurozone is less positive for bonds       government bonds and underweight
shorter-term money market rates           than in the US. Although leading          in corporates, high yield and
continue to have an unusually large       indicators are coming off their peaks,    emerging markets bonds.
spread over central bank rates.           we expect third-quarter economic
                                                                                    The problems with sub-prime
                                          data to be more robust.
US                                                                                  mortgages intensified in late July
                                          Unemployment has come down to
                                                                                    and in August. Problems that first
Our overall view on US bonds is           levels considered close to the
                                                                                    seemed to be limited to the US
neutral. The macroeconomic                natural rate. This suggests that
                                                                                    spread into other financial markets.
backdrop has improved in the light of     growth is still above trend, which
                                                                                    The second-biggest European bank,
the weak jobs data and lower              would induce further inflationary
                                                                                    BNP Paribas, froze access to three
inflation numbers. In addition,           pressures. But the recent pressures
                                                                                    funds and a couple of German banks
improvements in labour productivity,      in the money markets make it
                                                                                    were hit by losses on what at first
lower unit labour costs, gradually        unlikely that the ECB will hike rates.
                                                                                    seemed relatively risk-free
rising unemployment and declining         Ten-year Bund valuations look
                                                                                    mortgage-backed securities
commodity prices (ex-oil) were bond       neutral, with recent gains
                                                                                    portfolios. On 9 August, the ECB
friendly. Although most inflation         underpinned by the flight-to-quality
                                                                                    pumped EUR 95 bln into the market
measures are at the higher end of         theme. We are expecting some
                                                                                    after interbank liquidity started to dry
the Fed’s comfort zone—or even            modest curve steepening over the
                                                                                    up. Later, the Fed and the BoJ
outside it—we do not think that           next three months.
                                                                                    followed the ECB’s example. Since
inflation will be a problem. The
                                          Japan                                     then, money markets have not
recent cut in the discount rate was
                                                                                    calmed down. Further liquidity
driven by the Fed’s desire to calm        The latest macro data has been
                                                                                    injections by the central banks
the market and keep credit liquid.        bullish for bonds. GDP shrank in the
                                                                                    followed and money market rates

                                                                                                                    Page 3
                                                                 GLOBAL TACTICAL ASSET ALLOCATION

are still widely above central bank       a result, we have a 1.40 forecast for     There are a number of positive
target rates, indicating that financial   the euro/dollar rate in twelve months,    factors for equities at present. First,
parties do not trust each other.          which is close to the current position.   corporate balance sheets are in
                                          If the Japanese economy claws its         good shape. Indeed, the current sub-
Banks and other financial institutions
                                          way out of the current deflationary       prime problems may actually prevent
are currently going through their
                                          period, the BoJ is likely to resume       corporates from over-leveraging
books, which should help to clarify
                                          hiking rates again in 2008, which         themselves. Moreover, even fiscal
where the risks are located. But this
                                          should lead to an appreciation of the     measures may be taken to prop up
will probably be a time-consuming
                                          yen. We are forecasting that the yen      the economy. Second, central banks
process. We therefore expect
                                          will appreciate to 110 against the US     seem to be willing to cut interest
nervousness in financial markets to
                                          dollar over the next twelve months.       rates and flood markets with liquidity
persist and volatility to remain high.
                                          But the uncertainties surrounding         to prevent a credit crunch. Reflation
In such as environment, riskier
                                          this forecast are substantial. If         has been a powerful driver for
bonds are likely to underperform.
                                          investors suddenly become more            equities in the past, and we expect
And now that markets are growing
                                          risk averse, the yen could appreciate     low interest rates to support liquidity.
more concerned about the possibility
                                          swiftly. On the other hand, if the        Third, inflation is relatively high in the
of a US recession, the outlook for
                                          economy remains in the doldrums           central banks’ tolerance zones, but
risky assets has become even more
                                          for a longer period, markets may          is likely to be a non-issue if the US
complicated. We believe that a
                                          anticipate a return to the zero-          economy slows. Fourth, outside the
loosening of monetary (and fiscal)
                                          interest rate policy. In such a case,     US, the rest of the world seems to
policy may prevent the US economy
                                          the carry trade may be implemented        be in a good shape. European
from landing up in a recession.
                                          again, making it likely that the yen      growth is above trend and China is
Nonetheless, recession fears will not
                                          would depreciate significantly            recording double-digit growth
disappear in the short term, thereby
                                          against both the euro and the US          numbers. Fifth, valuations are not
limiting the upside potential for
                                          dollar.                                   overstretched, as was the case in
riskier markets for some time.
                                                                                    previous recessions. One could
CURRENCIES                                                                          argue, of course, that valuations are
                                          The outlook for equities remains          stretched on the basis of cyclically
We forecast no major changes for
                                          positive, although there are              adjusted earnings, but we believe
the US dollar either in the shorter
                                          significant risks. First, the market      that the prospects for earnings
term or in the longer term. We
                                          has remained volatile since the           growth in the coming period are
believe the downside risk for US
                                          problems in financial markets             relatively favourable, due to
interest rates is limited because the
                                          developed. The MSCI World index           globalisation, low labour costs,
market has already priced in 75 bp
                                          dropped by more than 10% from             deregulation and the implementation
of cuts. As we expect the ECB to
                                          mid-July but recouped half of its loss    of productivity-enhancing IT.
remain on hold for the next few
                                          between mid-August and early
meetings, the expected interest-rate                                                Regional allocation
                                          September. The volatility is also
differential should remain stable.
                                          evident in the VIX index. Before the      US and Europe
This could change, of course, if the
                                          sub-prime related problems began,
US slips into a recession––when the                                                 In local currency terms, the
                                          the VIX had been stable at 13-14
US dollar could weaken                                                              performance of US equities has
                                          levels; by mid-August, it had soared
substantially––but that is not our                                                  mirrored that of European equities. It
                                          to above 30. At the time of writing
main scenario. As we also expect                                                    is difficult to indicate a preference
                                          (mid-September), the VIX is still at
the BoJ to postpone rate hikes, a                                                   between the two regions. First, the
                                          25. If we are right that a recession
similar line of reasoning applies to                                                softening of the US dollar worked to
                                          can be avoided, the downside for
the yen/dollar rate. Our forecasts for                                              the benefit of US exporters and
                                          equity markets should not be too big;
the coming three months are 1.38 for                                                helped to boost US profits. On the
                                          in 1987 and 1998, equity markets fell
the euro/US dollar and 112 for the                                                  other hand, a weaker dollar makes
                                          by some 20% and quickly recovered
yen/dollar.                                                                         US investments less attractive for
                                          in both years. Twelve months after
                                                                                    eurozone-based investors. Although
In the longer term, we expect some        the respective declines, the MSCI
                                                                                    the economic risks in the US are
softening of eurozone growth, while       World index was up by 23% from the
                                                                                    greater due to the sub-prime
the US may emerge from its                1987 trough and 38% up from the
                                                                                    problems, interest-rate risks in the
housing-market-related problems in        1998 trough. Nonetheless, if there is
                                                                                    eurozone are more significant. The
2008. This could lead to a higher         a recession in the US, the downside
                                                                                    ECB is still on hold but has a clear
interest-rate differential with Europe    is substantial. At the time of the
                                                                                    tightening bias, while the Fed seems
and upward pressure on the                savings & loan crisis 1990-1991, the
                                                                                    to be on the verge of cutting interest
currency. On the other hand, we also      MSCI World fell by 22%, while equity
                                                                                    rates. The US has a lower beta and
expect the large current-account          prices halved in the 2001-2003 bear
                                                                                    would normally be the preferred
deficit to keep the dollar in check. As   market.
                                                                                    market for safe-haven flows, but in

                                                                                                                      Page 4
                                                                GLOBAL TACTICAL ASSET ALLOCATION

the current economic circumstances,       robust, albeit at lower levels than in   in yields by 50-100 bp. The German
Europe and emerging markets are           the last few years. We therefore         economy remains in good shape,
likely to safeguard global growth.        continue to favour cyclical sectors      although some German banks have
                                          that are not directly exposed to the     recently got into trouble due to their
                                          consumer (such as IT and materials)      US sub-prime exposure. Rents are
The situation for Japanese equities       and commodity-related sectors (such      increasing sooner than expected,
is less favourable than for eurozone      as energy and materials). As the US      even in Berlin. Within the Asia
and US equities. First, the economy       consumer is at the heart of the          Pacific region, Hong Kong has great
seems to be in the doldrums. Growth       current problems, we remain              upside potential. Chinese investors
contracted in the second quarter and      underweight in consumer                  are now allowed to invest in Hong
inflation is at 0% or, for some           discretionary and consumer staples.      Kong, which should push prices
inflation indicators, even below zero.    We continue to favour the healthcare     higher. In Japan, however, we
Second, the yen has appreciated as        and telecom sectors, because of          expect opportunities to be more
investors became more risk averse         their large-cap bias and because         limited in the near future, as the
and unwound the carry trade. A            they can function as a defensive         Japanese are the end-holders of a
more expensive yen is hurting profits     hedge. We maintain our small             significant amount of US sub-prime
and could be an additional negative       underweight in utilities, as we are      debt.
now that domestic demand is               expecting long-term interest rates to
                                                                                   We are shifting property assets out
softening. Third, there are no direct     rise from current levels. We
                                                                                   of Asia and Europe into the
triggers for the equity market to         considered trimming our
                                                                                   Americas. We are currently modestly
thrive. The political situation is a      underweight in financials, which
                                                                                   overweight in Europe and the US,
mess, after the LDP lost the Upper        typically outperforms after a Fed rate
                                                                                   and underweight in Asia. We have
House elections and Shinzo Abe            cut. But due to the ongoing turmoil in
                                                                                   some concern over the level of
resigned as prime minister. There is      financial markets, we think such a
                                                                                   Japanese exposure to US sub-prime
no great flow of M&A deals,               move would be premature. It is
                                                                                   loans, and about a reduction in US
particularly those involving              possible that not all the bad news
                                                                                   consumer spending that could
foreigners, in the pipeline, and          has been priced in and that there will
                                                                                   potentially slow Chinese growth. In
wages keep falling on a yoy basis.        be more earnings disappointments
                                                                                   addition, in the event of a worldwide
                                          as financial institutions go through
Emerging markets                                                                   growth slowdown, the US would
                                          their books.
                                                                                   provide the best defence.
We remain sanguine about emerging
                                          PROPERTY                                 Furthermore, if the global economy
markets, even though they have
                                                                                   stabilises, the Americas offer the
recouped a good part of their losses      Now that liquidity in the US debt
                                                                                   best relative valuations.
since 23 July. First, global economic     market is drying up, private equity
growth remains healthy. Although          deals are in jeopardy, although it is    ASSET ALLOCATION
the situation may be less favourable      likely that the Hilton and Archstone
                                                                                   Despite the volatility in markets, we
than in 2006 and early 2007, there is     deals will be finalised. There is some
                                                                                   have made no changes to our asset
a good chance the emerging                concern about the large number of
                                                                                   allocation. We maintain our
markets will grow at high rates.          adjustable-rate mortgages that are to
                                                                                   overweight in equities and our
Chinese growth is still at double-digit   be reset within the next year, as
                                                                                   underweight in bonds. We remain
levels, which is propping up              these residential mortgage issues
                                                                                   neutral in both cash and property.
materials prices. This in turn is a       could start to affect the commercial
stimulus to commodity-rich                sector. Defaults have increased and      Even in the light of the current
countries. Emerging markets still         lenders have tightened their             financial-market turmoil, we continue
have a valuation cushion versus           underwriting standards. Valuations       to believe that an overweight equity
developed markets, although we            look enticing. We prefer to position     position is justified, albeit that such a
admit that the margin between the         ourselves within sectors that are        position is not without risks. The US
P/Es in developed and emerging            subject to longer lease terms, such      economy may slow further, but
markets is diminishing. But we            as malls and offices, and with           global growth is likely to be
believe that emerging markets are         companies that have strong balance       substantial, particularly in emerging
likely to be the least influenced by      sheets. Smaller companies with debt      markets and Europe. Profit growth is
the US housing market troubles, and       concerns are the ones to avoid in        likely to benefit from global growth
that a loosening of monetary policy       this environment. There is a feeling     and IT implementation, deregulation
by the Fed will have a positive           that the European market is              and globalisation. The Fed rate cuts
impact on emerging markets.               bottoming out and sentiment will         that seem to be in the offing should
                                          reverse in the coming months.            also help to support liquidity, keeping
                                          Again, as in the US, yields in the UK    interest-rate risk low.
In our sector policy, we take the         are expected to increase. In fact,
                                                                                   Given that 75 bp of rate cuts by the
stance that global growth will be         current valuations reflect an up-tick
                                                                                   Fed are priced in by the markets, we

                                                                                                                    Page 5
                                                                                 GLOBAL TACTICAL ASSET ALLOCATION

do not expect Treasury yields to fall                offset by some negatives. On the                       the leveraged environment, which
by much. As a result, we are not                     one hand, valuation has improved,                      now seems to have vanished.
changing our underweight position,                   given that property has                                Finally, the correlation between
as a US recession is not our main                    underperformed equities so                             property and equities has shot up
scenario. We acknowledge that the                    significantly since March. In addition,                from 30% two years ago to 63%,
turmoil in financial markets is likely               property is also being supporting                      making property a less-attractive
to continue as financial institutions                structural factors, such as the                        diversifier in a multi-asset portfolio.
go through their books. We therefore                 implementation of REIT legislation in
remain underweight in the riskier                    Germany and the UK, and pension
bond categories.                                     funds’ structural underweight in the
                                                     asset class. On the other hand,
We remain neutral in property, as
                                                     property benefited significantly from
the positives on the asset class are

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